Like other types of insurance, LTC insurance is sold in a variety of ways and through a number of distribution channels. Most policies are sold by agents and brokers directly to individuals. The distribution channel which is growing the most quickly, however, is the employer group market. Here agents are able to market and sell group policies to a large number of individuals, each of whom receives an individual certificate of insurance under a group plan. In 2000, new individual sales accounted for 75% of the market and group sales -- primarily employer-sponsored -- represented only 25% of new sales. By 2010, new individual sales had fallen to 58% of the market and group channels comprised 42% of new sales.20, 21

While most agents are independent -- this indicating that they can represent and sell policies from a variety of insurers -- a number of companies do have what are called "captive agents". In these companies agents can only sell that company's specific policy. Only a very few companies have specialist LTC agents, whose sole focus is selling LTC insurance policies. Currently there are fewer than 10,000 agents selling any meaningful number of policies.

Commissions for LTC insurance tend to be "heaped". This means that first-year commissions relative to premiums are high -- 40%-60% of premium with some companies approaching 100% -- and then they tend to drop down to between 5% and 15% of ongoing renewal premiums.22 This compensation structure does cause significant first-year cash flow challenges for companies. Moreover, it delays the timing of profit emergence as companies may be in a loss position for the first year after a policy is sold.

The 1990s were characterized by companies competing for the allegiance of large distribution forces by paying higher commissions to attract and encourage them to represent and sell their, rather than competitors', policies. This led to a situation where the costs of the product increased and market share shifted rapidly between companies as agent groups focused on selling the product that paid the highest commissions. The higher commissions did not appear to draw enough new agents into the market to effectively increase overall market size significantly over the past decade.

It is often said by industry participants that LTC insurance is not "bought" by consumers, but rather, it is "sold" to consumers. Challenges related to individuals' lack of understanding about future risk, an incorrect belief that government will pay for LTC, confusion about products, belief that other products already address the risk, its cost in relation to the value that people believe it has, and a lack of belief in the underlying value proposition have all contributed to the overall challenge of growing the market.23, 24 Even in the presence of such challenges, however, two-thirds of surveyed individuals from the general population age 50 and over in 2010 indicated that they were aware of companies that offer this insurance, and about 40% had been approached or had considered purchasing it.25

It often takes agents 2-3 visits to close a sale. Still agents are critical in the process and are viewed very positively by buyers; in a study of buyers in 2000, more than 90% reported that the agent they had dealt with was knowledgeable, explained the product well, and helped them select a policy that met their needs. Moreover, after a spouse, agents were seen to be the most important in individuals' decision to purchase a policy.26

In terms of overall sales and market penetration, the first half of the 1990s represented the fastest growth over the 20 year period and coincided with the proliferation of policies covering home care and nursing home care. The precipitous decline in sales in the early part of this century coincides with a growing number of companies exiting the market, the general declines in the stock market which affected demand, and the significant price increases in new policies offered by insurers.

SOURCE: Survey of executives from 25 LTC carriers who exited the market or exited segment of the market.

Clearly, as policies became more attractive to consumers in the 1990s, the market grew significantly both in terms of covered lives and insurance premium. It is also worth noting that during the 1990s, there were minimal changes in the underlying pricing assumptions of policies. In fact, between 1990 and 2000, the average value in policies -- as measured by changes in average value of policy benefits -- increased more quickly than the average premium during the period.28 This trend foreshadowed a later criticism and concern with LTC policies expressed by ratings agencies that early designs of policies offered benefits that were too generous relative to factors like actual benefit utilization.29, 30

Figure 5 shows that in 2010, the total number of individuals with LTC insurance coverage was 7.3 million. This does not represent all people who have ever had policies, only those who still have them. Changes in covered lives reflect both growth in annual sales as well as changes in the number of policyholders who maintain their coverage over time.

Figure 6 shows the annual change in covered lives over the period. As shown, between 1992 and 2000 there was tremendous variation in the growth rate of covered lives and after 2003, there has been a relatively steady yet small annual increase in covered lives. Given the aging of the individuals with policies, this suggests that the growth in sales throughout the decade has declined or been relatively flat.

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